Electricity Restructuring
FERC Could Take Additional Steps to Analyze Regional Transmission Organizations' Benefits and Performance Gao ID: GAO-08-987 September 22, 2008In 1999, as a part of federal efforts to restructure the electricity industry, the Federal Energy Regulatory Commission (FERC) began encouraging the voluntary formation of Regional Transmission Organizations (RTO)--independent entities to manage regional networks of electric transmission lines. FERC oversees six RTOs that cover part or all of 35 states and D.C. and serve over half of U.S. electricity demand. As electricity prices increase, stakeholders-- organizations and individuals with financial and regulatory interest in the electricity industry--have voiced concerns about RTO benefits and how RTO expenses and decisions influence electricity prices. GAO was asked to review (1) RTO expenses and key investments in property, plant, and equipment from 2002 to 2006, the most current data available; (2) how RTOs and FERC review RTO expenses and decisions that may affect electricity prices; and (3) the extent to which there is consensus about RTO benefits. To do so, GAO reviewed documentation and data and spoke with FERC officials and experts.
RTO expenses and investments in property, plant, and equipment vary, depending on the size of the RTO and its functions. Expenses for the six RTOs FERC oversees totaled $4.8 billion from 2002 to 2006, and property, plant, and equipment investments totaled $1.6 billion as of December 2006. RTOs and FERC rely on stakeholder participation to identify and resolve concerns about RTO expenses and decisions that affect electricity prices, such as decisions about reliability and whether to develop markets for electricity and other services. The stakeholders GAO spoke with in two RTO regions value the opportunity for input but have concerns about the resources and information required to participate. Moreover, although regular review of RTO budgets could help FERC with its responsibility to ensure RTO rates remain just and reasonable or determine if a new rate proceeding is needed, FERC's review of RTO budgets varies. Furthermore, while FERC requires RTOs to report actual expenses annually, it does not regularly review this information for accuracy or reasonableness and is at risk of using and providing to the public inaccurate and incomplete information. FERC officials, industry participants, and experts lack consensus on whether RTOs have brought benefits to their regions. Many agree that RTOs have improved the management of the transmission grid and improved generator access to it; however, there is no consensus about whether RTO markets provide benefits to consumers or how they have influenced consumer electricity prices. FERC officials believe RTOs have resulted in benefits; however, FERC has not conducted an empirical analysis of RTO performance or developed a comprehensive set of publicly available, standardized measures to evaluate such performance. Without such measures, FERC will remain unable to demonstrate the extent to which RTOs provide consumers and others with benefits--information that could aid FERC in its evaluation of its decision to encourage the creation of RTOs and help address divisions about which benefits RTOs have provided.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-987, Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations' Benefits and Performance
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Report to the Committee on Homeland Security and Governmental Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
September 2008:
Electricity Restructuring:
FERC Could Take Additional Steps to Analyze Regional Transmission
Organizations' Benefits and Performance:
GAO-08-987:
GAO Highlights:
Highlights of GAO-08-987, a report to the Committee on Homeland
Security and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
In 1999, as a part of federal efforts to restructure the electricity
industry, the Federal Energy Regulatory Commission (FERC) began
encouraging the voluntary formation of Regional Transmission
Organizations (RTO)”independent entities to manage regional networks of
electric transmission lines. FERC oversees six RTOs that cover part or
all of 35 states and D.C. and serve over half of U.S. electricity
demand. As electricity prices increase, stakeholders”organizations and
individuals with financial and regulatory interest in the electricity
industry”have voiced concerns about RTO benefits and how RTO expenses
and decisions influence electricity prices.
GAO was asked to review (1) RTO expenses and key investments in
property, plant, and equipment from 2002 to 2006, the most current data
available; (2) how RTOs and FERC review RTO expenses and decisions that
may affect electricity prices; and (3) the extent to which there is
consensus about RTO benefits. To do so, GAO reviewed documentation and
data and spoke with FERC officials and experts.
What GAO Found:
RTO expenses and investments in property, plant, and equipment vary,
depending on the size of the RTO and its functions. Expenses for the
six RTOs FERC oversees totaled $4.8 billion from 2002 to 2006, and
property, plant, and equipment investments totaled $1.6 billion as of
December 2006.
RTOs and FERC rely on stakeholder participation to identify and resolve
concerns about RTO expenses and decisions that affect electricity
prices, such as decisions about reliability and whether to develop
markets for electricity and other services. The stakeholders GAO spoke
with in two RTO regions value the opportunity for input but have
concerns about the resources and information required to participate.
Moreover, although regular review of RTO budgets could help FERC with
its responsibility to ensure RTO rates remain just and reasonable or
determine if a new rate proceeding is needed, FERC‘s review of RTO
budgets varies. Furthermore, while FERC requires RTOs to report actual
expenses annually, it does not regularly review this information for
accuracy or reasonableness and is at risk of using and providing to the
public inaccurate and incomplete information.
FERC officials, industry participants, and experts lack consensus on
whether RTOs have brought benefits to their regions. Many agree that
RTOs have improved the management of the transmission grid and improved
generator access to it; however, there is no consensus about whether
RTO markets provide benefits to consumers or how they have influenced
consumer electricity prices. FERC officials believe RTOs have resulted
in benefits; however, FERC has not conducted an empirical analysis of
RTO performance or developed a comprehensive set of publicly available,
standardized measures to evaluate such performance. Without such
measures, FERC will remain unable to demonstrate the extent to which
RTOs provide consumers and others with benefits”information that could
aid FERC in its evaluation of its decision to encourage the creation of
RTOs and help address divisions about which benefits RTOs have
provided.
Figure: U.S. Regional Transmission Organizations:
[refer to PDF for image]
This figure is a map of the United States depicting the Regional
Transmission Organizations.
Source: FERC (data); map (Platts POWERmap, December 2007).
Note: FERC regulates California ISO, ISO New England, Midwest ISO, New
York ISO, PJM, and Southwest Power Pool but does not regulate the
Electric Reliability Council of Texas.
[End of figure]
What GAO Recommends:
GAO recommends that FERC develop an approach for regularly reviewing
RTO budgets and annual financial reports, and develop and report on
standardized measures that track RTOs‘ performance. FERC generally
agreed with our report and recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-987]. For more
information, contact Mark Gaffigan, (202) 512-3841, gaffiganm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
RTO Expenses and Investments in Property, Plant, and Equipment Varied
Considerably:
RTOs and FERC Rely on Stakeholder Input when Evaluating RTO Expenses
and Decisions That May Affect Electricity Prices:
Experts, Industry Participants, and FERC Lack Consensus on the Benefits
of RTOs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: RTO Characteristics and Functions Required by FERC Order
2000:
Appendix III: RTO Inflation-Adjusted Expenses and Full-time Equivalents
from 2002 to 2006, by RTO:
Appendix IV: Megawatt hour Load Served by RTO from 2002 through 2006:
Appendix V: Inflation-Adjusted RTO 2006 Expenses Reported on FERC Form
No. 1:
Appendix VI: Investment in Property, Plant, and Equipment for RTOs as
of December 31, 2006:
Appendix VII: Indexed Electricity Prices, 1990-2007:
Appendix VIII: Summary of Expert Studies Analyzing the Benefits of
Restructuring and Regional Transmission Organizations:
Appendix IX: Comments from FERC:
Appendix X: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Selected RTO Responsibilities:
Table 2: Inflation-Adjusted Rates per MWh Charged to RTO Market
Participants, 2002-2006:
Table 3: RTO Processes for Acquiring Stakeholder Input:
Table 4: Estimated Stakeholder Meetings by RTO, Calendar Year 2007:
Table 5: Last FERC Decision to Approve Rates to Recover Expenses:
Table 6: RTO Budget Submissions to FERC:
Figures:
Figure 1: U.S. Regional Transmission Organizations:
Figure 2: Components of a Typical Consumer's Electricity Costs in New
England:
Figure 3: Total Inflation-Adjusted RTO Expenses, 2002 to 2006:
Figure 4: Inflation-Adjusted Expenses per MWh by RTO, 2006:
Figure 5: Inflation-Adjusted Expenses per MWh by RTO, 2002-2006:
Figure 6: Inflation-Adjusted Expenses per MWh by RTO as Reported in the
2006 FERC Form No. 1:
Figure 7: Inflation-Adjusted Investment in Property, Plant, and
Equipment as of December 2006:
Figure 8: Midwest ISO's Committee Structure:
Figure 9: Retail Electricity Prices by State, 2007:
Figure 10: Change in Inflation-Adjusted Retail Electricity Prices for
Industrial Consumers, 1990-2006:
Figure 11: Inflation-Adjusted Prices of Coal and Natural Gas Used to
Generate Electricity, 1996-2006:
Figure 12: Change in Nuclear Plant Capacity Factors, 1996-2006:
Figure 13: Comparison of Relative Electricity Prices for Industrial
Customers, 1990-2007:
Abbreviations:
Btu: British thermal unit:
FERC: Federal Energy Regulatory Commission:
FTE: full-time equivalent:
ISO: Independent System Operator:
KWh: kilowatt hour:
MWh: megawatt hour:
OASIS: Open Access Same Time Information System:
RTO: Regional Transmission Organization:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 22, 2008:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The efficient and reliable operation of the electricity industry is
critical to the health of the U.S. economy and well-being of Americans.
Residential consumers rely on electricity to power their households,
and electricity is a key input for businesses that produce trillions of
dollars in products and services. Consumer expenditures for electricity
amounted to $343 billion in 2007, the most recent year for which annual
data were available. After declining in the late 1990s, retail
electricity prices rose to an average of nearly 9 cents per kilowatt
hour (KWh) in 2006, an almost 9 percent increase from 2005 and the
largest annual increase since 1982. Prices surpassed 9 cents per KWh in
2007, and a number of experts anticipate continued price increases in
coming years. These rising prices have spurred some to question whether
federal policies to introduce competition into electricity markets and
new entities to facilitate that change--referred to in this report as
wholesale restructuring--have brought improvements or whether they
themselves are responsible for rising prices.
For many years, the electricity industry has consisted of regional
monopolies that were regulated by states--generally through state
utility commissions--and the federal government--through the Federal
Energy Regulatory Commission (FERC).[Footnote 1] During the 1990s,
efforts were made to transform the electricity industry from one
characterized by monopoly utilities that provided local consumers with
electricity at regulated rates to one in which companies compete to
sell electricity to customers at prices that are determined under more
competitive conditions.[Footnote 2] This restructuring took place in
response to statutory and regulatory changes at the federal level and
in many states. The overall goal of this broad restructuring was to
increase competition in wholesale markets--where power is bought and
sold by utilities and other resellers--and retail markets--where power
is sold to the ultimate consumer--with the goal of giving electricity
consumers benefits such as lower prices and access to a wider array of
retail services. Many stakeholders--organizations and individuals with
financial and regulatory interest in the electricity industry,
including consumer advocacy groups, owners of generation and
transmission resources, and others--are interested in whether
restructuring has achieved its goals, and how it may have affected
prices that consumers pay.
In 1999, as a part of the wholesale restructuring effort, FERC began
encouraging the voluntary formation of Regional Transmission
Organizations (RTO)--independent entities to manage regional networks
of electric transmission lines, called the grid, and give market
participants, such as owners of power plants and other sellers of
electricity, nondiscriminatory access to these lines.[Footnote 3] To
form an RTO, owners of transmission lines voluntarily agree to turn
over operational authority--but not ownership--of their lines to the
RTO. FERC encouraged the formation of RTOs to, among other things,
improve the pricing of transmission service and ease the entry of new
generators, thus promoting efficiency in wholesale electricity markets
and ensuring consumers pay the lowest possible price for reliable
service. As part of its evaluation of whether to create RTOs, FERC
estimated that RTOs could provide significant benefits such as enhanced
electric reliability, improved efficiencies in the management of
electricity transmission, and lower electricity prices for consumers,
among others. FERC estimated the benefits of RTOs to be at least $2.4
billion annually, due to cost savings from the improved operational
efficiency of generators, easier access to transmission service, and
other factors.
To date, seven RTOs have developed across the United States, covering
part or all of 35 states and the District of Columbia and serving over
half of U.S. demand.[Footnote 4] These RTOs vary in the amount of
electricity transmission they manage and the size of territory they
serve. Their functions generally include administering electricity
transmission, managing and monitoring the competitiveness of wholesale
markets for electricity and other services, and planning for long-term
reliability.
In parts of the United States with RTOs, wholesale electricity prices
are related to decisions RTOs make about system reliability,
transmission planning and how to design markets that establish prices
for electricity and other services, as well as the operational and
investment expenses of RTOs that are recovered through FERC-approved
rates. The prices consumers ultimately pay for electricity are affected
by the wholesale price, as well as a number of decisions made by
regulators about transmission and distribution, among other things, and
by the price of fuel used to generate electricity. FERC has statutory
responsibility to ensure that prices in wholesale electricity markets-
-including those administered by RTOs--are "just and reasonable" and
not "unduly discriminatory or preferential."[Footnote 5] To do so, it
reviews and approves RTO market rules and monitors the competitiveness
of RTO markets. FERC is also responsible for ensuring the rates RTOs
charge customers to recover expenses--capital expenses, such as
software needed to administer electricity markets, and operational
expenses, such as salaries and benefits--are just and reasonable. To do
so, FERC conducts formal rate proceedings in which it considers
information about proposed RTO expenses and comments from interested
parties, though the proceedings may not occur annually. In certain
circumstances, it may also consider other sources of information on RTO
expenses, including budgets RTOs develop annually that contain
information on proposed expenses and an annual financial report--the
FERC Form No. 1--that contains information on actual RTO expenses. If
necessary, such as when facts are in dispute, FERC may hold a trial-
type evidentiary hearing before an administrative law judge before
determining the rates for an RTO. Stakeholders also play a role in
reviewing RTO expenses and decisions that affect electricity prices by
providing comments to the RTOs and FERC.
A number of industry participants have voiced concerns about how RTO
expenses and decisions influence electricity prices and whether RTO
costs outweigh their benefits. Generally speaking, RTO expenses are
small compared to wholesale electricity prices. For example, ISO New
England's non-inflation-adjusted expenses were 87 cents per megawatt
hour (MWh) in 2006; its average wholesale electricity price was $62.74
per MWh that same year. Because of the potential for RTO markets to
influence wholesale, and ultimately consumer, prices, some of
consumers' most significant concerns relate to RTO decisions about
developing and operating markets for electricity and other services.
Experts from industry and the academic community have begun to evaluate
these issues, as well as the broader effects of restructuring. In this
context, this report provides information about the steps FERC
officials and other experts have taken to analyze RTO expenses and
benefits. Specifically, this report provides information on (1) RTO
expenses from 2002 to 2006 and key investments in property, plant, and
equipment; (2) how RTOs and FERC review RTO expenses and decisions that
may affect electricity prices; and (3) the extent to which there is
consensus about whether RTOs have provided benefits to consumers.
To determine the total expenses incurred by RTOs from 2002 to 2006, the
most current year for which data were available when we began our
review, and their key investments in property, plant, and equipment, we
reviewed independent public auditor reports over this period, as well
as information the RTOs reported on their full-time-equivalent
personnel and transmission volume.[Footnote 6] We also reviewed 2006
financial information the RTOs submitted to FERC. We adjusted all
expense amounts for inflation with 2007 as the base year. We focused on
six RTOs during our study: California ISO, ISO New England, Midwest
ISO, New York ISO, PJM Interconnection (PJM), and Southwest Power Pool.
We did not consider the seventh, the Electric Reliability Council of
Texas, because it is primarily regulated by the Public Utility
Commission of Texas, rather than FERC. To determine how FERC and RTOs
review RTO expenses and decisions, we collected broad information from
these six RTOs about their analysis of expenses and their decision-
making processes. We also conducted site visits and collected more in-
depth information for two RTOs--ISO New England and the Midwest ISO. In
addition, we spoke with FERC officials and reviewed related
documentation that outlined FERC's steps to review RTO expenses for
reasonableness. While we generally considered FERC's oversight of RTO
decisions, we did not perform an in-depth analysis of FERC's review of
specific RTO decisions that may affect electricity prices. Finally, to
understand the extent to which there is consensus about whether RTOs
have provided benefits to consumers, we interviewed FERC officials and
reviewed related documentation, including FERC's initial assessment of
RTO expected benefits and academic and industry studies. We also
interviewed several experts in the field of electricity restructuring
to discuss their opinions on the benefits and costs of RTOs and their
assessments of the adequacy of FERC's analysis of RTOs to date. We
conducted this performance audit from October 2007 to September 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. A more complete discussion
of our scope and methodology is provided in appendix I of this report.
Results in Brief:
RTO expenses and investments in property, plant, and equipment vary
considerably depending on the size of the RTO and functions it carries
out. Inflation-adjusted expenses for the six RTOs overseen by FERC
totaled $4.8 billion from 2002 to 2006--ranging from $227 million for
Southwest Power Pool, a smaller RTO in terms of 2006 transmission
volume and the number of functions it performs, to $1.4 billion for
PJM, an RTO with many diverse functions and the largest transmission
volume in 2006. Despite having the highest expenses, PJM had the second
lowest inflation-adjusted expense per MWh, because RTOs with greater
electricity transmission volume can spread their expenses over this
volume, thus lowering the amount of RTO-related expenses per MWh. These
per MWh inflation-adjusted expenses have varied for the RTOs from 2002
to 2006, with inflation-adjusted expenses for three RTOs rising and
three declining. RTOs' Form No. 1 filings to FERC in 2006 provide
better visibility of transmission and market expenses than in previous
years, because FERC revised the Form No. 1 that year to require
reporting of additional information on these categories of expenses. In
2006, about 17 percent of all RTO inflation-adjusted expenses were for
transmission services, 13 percent were for market expenses, 39 percent
were for administrative and general expenses, and 31 percent consisted
of other expenses. In addition to expenses incurred from 2002 to 2006,
the six RTOs also made investments in property, plant, and equipment.
These investments, when adjusted for inflation, totaled $1.6 billion as
of December 2006 and consisted primarily of software and equipment used
to monitor the flow of electricity along transmission lines and
administer RTO markets.
RTOs and FERC rely heavily on the participation and views of
stakeholders when evaluating RTO expenses and decisions that may affect
electricity prices. Specifically, RTOs seek stakeholder input when
making decisions that may affect prices, such as developing markets for
electricity, and evaluating proposed RTO expenses. RTOs have
facilitated the formation of stakeholder committees and working groups
to discuss these issues and advise the RTOs' boards of directors, which
makes the final decisions. The stakeholders we spoke with in two RTO
regions valued this opportunity for input, but found that attending
stakeholder meetings was resource intensive. For example, one RTO told
us over 600 meetings were open to stakeholders in 2007, and some
stakeholders noted that participating in so many meetings could require
substantial stakeholder staff and other resources. In addition,
stakeholders representing consumers expressed concern that the RTOs did
not place adequate emphasis on how decisions may affect consumer
prices. For example, some stakeholders expressed concern that RTOs base
some of their decisions on overly conservative assumptions about
reliability that may raise consumer prices, such as paying
noncompetitive generators that these stakeholders did not believe were
needed for reliability to remain available for electricity production.
Moreover, one stakeholder was concerned that the costs of operating
these generators, which may benefit only certain local areas, were
unfairly borne by consumers outside those local areas. FERC's reviews
of proposed expenses occur when it considers whether the rates RTOs
charge are just and reasonable, but the frequency of this review
varies. Furthermore, although RTO budgets offer one tool FERC could use
to consider whether rates remain just and reasonable between rate
proceedings, the extent to which FERC reviews proposed expense
information in RTO budgets varies. Some consumer groups have expressed
concern over FERC's lack of more frequent, independent analysis of
budgets, and without more regular review of this information, FERC may
be missing an opportunity to improve its oversight of RTO rates.
Furthermore, while FERC requires RTOs to report their actual expenses
annually using the FERC Form No. 1, it does not regularly review this
actual expense information for accuracy or reasonableness. This
increases the risk that FERC may inappropriately use and provide to the
public inaccurate and incomplete RTO financial data, limiting the
effectiveness of the Form No. 1 as a tool for determining whether RTO
rates are just and reasonable. In fact, in reviewing the 2006 Form No.
1s, we noted a reporting error that overstated certain expenses
reported by one RTO by millions of dollars that remained on FERC's Web
site for more than a year. After being informed of this error, FERC
initiated an audit of whether one RTO's expenses were reported
accurately on its Form No. 1. Similar to the RTOs, FERC also emphasizes
the stakeholder process when reviewing RTO expenses and decisions that
have the potential to affect consumer electricity prices. FERC
officials explained that RTO decisions undergo much scrutiny during the
RTO stakeholder process and acknowledged that this process is integral
to FERC's process for identifying imprudent and unreasonable expenses
and its approval of other RTO decisions. While the stakeholder process
is likely a useful tool that FERC can use in making such decisions,
more scrutiny of RTO budgets and the Form No. 1s could also have a role
in supplementing FERC's current oversight of RTO expenses and rates.
FERC officials, industry participants, and experts lack consensus on
whether RTOs have brought benefits to their regions that outweigh their
costs. Many agree that by integrating multiple transmission systems
into larger service areas, RTOs provide opportunities for certain
benefits, such as more efficient management of the transmission grid
and improved generator access to electricity markets, but some believe
that these benefits could have been achieved without RTOs. Many experts
and industry participants agree that RTOs are better positioned to more
frequently use the least costly and most efficient power plants,
although they do not agree about whether this has translated into
prices for consumers that are lower than they otherwise would have
been. Experts and industry participants are divided about whether the
markets developed and administered by RTOs provide benefits to
consumers and how they have influenced consumer electricity prices.
Specifically, advocates and critics of RTOs debate the extent to which
RTO markets, rising fuel prices, and other factors have contributed to
rising costs of electricity generation and generally higher prices in
RTO regions. Assessments developed by RTOs generally find that RTOs
benefit their regions. FERC officials also believe that RTOs have
resulted in net benefits to the economy, such as new efficiencies in
operating the regional transmission grid; however, FERC has not
conducted an empirical analysis of whether RTOs achieved the benefits
expected of them or developed a comprehensive set of publicly
available, standardized measures to help evaluate such performance.
GAO's Standards for Internal Control identify the value to
organizations of comparing actual performance to planned or expected
results; however, according to FERC, neither an empirical analysis nor
performance measures are necessary parts of FERC oversight of RTOs and
both would be methodologically challenging to develop.[Footnote 7]
Experts agreed that a onetime empirical analysis of RTO performance
would be difficult but added that tracking certain measures of RTO
success--for example, measures relating to transmission and generation
investment, plant efficiency, and reliability--could encourage better
RTO performance and potentially identify areas for improvement. Without
such measures, FERC will remain unable to demonstrate the extent to
which RTOs have provided consumers and others with benefits--
information that could aid FERC in its evaluation of the success of its
decision to encourage the creation of RTOs. Furthermore, information
gleaned from such measures could help FERC address the divisions among
experts and industry participants about the benefits of RTOs.
To improve its oversight of RTOs, we recommend that FERC (1) develop a
consistent approach for regularly reviewing RTO budgets and (2)
routinely review and assess the accuracy, completeness, and
reasonableness of the financial information RTOs report to FERC in
their Form No. 1 filings. To better understand the extent to which RTOs
have provided consumers and others with benefits, we are recommending
that FERC work with RTOs, stakeholders, and experts to develop
standardized measures to track the performance of RTO operations and
markets and report the performance results to Congress and the public.
FERC reviewed a draft of this report and generally agreed with our
report and recommendations.
Background:
The electricity industry includes four distinct functions: generation,
transmission, distribution, and system operations. Once electricity is
generated--whether by burning fossil fuels; through nuclear fission; or
by harnessing wind, solar, geothermal, or hydro energy--it is sent
through high-voltage, high-capacity transmission lines to areas where
it will be used. Once there, electricity is transformed to a lower
voltage and sent through local distribution wires for end use by
industrial plants, businesses, and residential customers. Because
electric energy is generated and consumed almost instantaneously, the
operation of an electric power system requires that a system operator
constantly balance the generation and consumption of power.
Historically, the electric industry developed as a loosely connected
structure of individual monopoly utility companies, each building and
operating power plants and transmission and distribution lines to serve
the exclusive needs of all the consumers in its local area. Because
these companies were monopolies, they were overseen by regulators who
balanced different stakeholder interests in order to protect consumers
from unfair pricing and other undesirable behavior. Retail electricity
prices were regulated by the states, generally through state public
utility commissions. States retained regulatory authority over retail
sales of electricity, construction of transmission lines within their
boundaries, and intrastate distribution. Generally, states set retail
rates based on the utility's cost of production plus a fair rate of
return. States also approved plans and spending for building new power
plants to serve regulated customers. In contrast, wholesale electricity
pricing and interstate transmission were regulated by the federal
government, principally FERC. Under law, FERC has the obligation to
ensure that the rates it oversees are "just and reasonable" and not
"unduly discriminatory or preferential."[Footnote 8] To meet this
responsibility, FERC approved rates for transmission and wholesale
sales of electricity in interstate commerce based on the utilities'
costs of production plus a fair rate of return on the utilities'
investment.
Since the early 1990s, the federal government has taken a series of
steps to restructure the wholesale electricity industry, generally
focused on increasing competition in wholesale markets. Federal
restructuring efforts have (1) changed how electricity prices are
determined, replacing cost-based regulated rates with market-based
pricing in many wholesale electricity markets, and (2) allowed new
companies to enter electricity markets.[Footnote 9] Some of these
efforts have focused on allowing nontraditional utilities to buy and
sell electricity in wholesale markets, while others have focused on
allowing nontraditional utilities to build new power plants and sell
electricity to utilities and others.
To facilitate formation of these markets and these companies' efforts
to buy and sell electricity, FERC initially required that transmission
owners under its jurisdiction, generally large utilities, allow all
other entities to use their transmission lines under the same prices,
terms, and conditions as those they apply to themselves. To do this,
FERC required the regulated monopoly utilities--which had historically
owned the power plants, transmission systems, and distribution lines--
to separate their generation and transmission functions, and encouraged
these companies to form independent entities, called Independent System
Operators (ISO), to manage the transmission network.[Footnote 10] In
recognition that these initial efforts were not sufficient, FERC issued
Order 2000 in December 1999 to encourage owners of transmission systems
to develop more robust organizations, called RTOs, to manage the
transmission networks and perform other functions that FERC believed
were important. FERC believed RTOs were needed to address impediments
to competitive wholesale markets: growing stresses on the transmission
grid and remaining discrimination in the provision of transmission
service--transmission owners operating their grids in a way that
favored their own interests over those of their competitors. FERC Order
2000 encouraged, but did not mandate, that transmission owners join
RTOs and allowed companies engaged in purchase and sale of electricity
in markets to continue to own power plants, retail utilities,
distribution lines, transmission lines, and other assets regulated by
FERC or the states.
FERC outlined minimum characteristics that RTOs were to have:
independence from control by any market participant, sufficient scope
to maintain reliability and support nondiscriminatory power markets,
operational authority for transmission facilities under their control,
and exclusive authority for maintaining the short-term reliability of
the grid they operate. Appendix II describes these characteristics in
more detail. In Order 2000, FERC opined that RTOs would achieve the
following benefits:
* eliminate multiple charges incurred when crossing transmission
systems owned by different utilities,
* improve management of electricity congestion--bottlenecks resulting
from insufficient transmission capacity to accommodate all requests to
transport power and maintain adequate safety margins for reliability,
* provide more accurate estimates of transmission system capacity--the
amount of electric power the transmission system can manage,
* increase efficiency in planning for transmission and generation
investments;
* improve grid reliability, and:
* reduce opportunities for discriminatory transmission practices.
[Footnote 11]
FERC expected the formation of RTOs to result in significant cost
reductions, additional efficiencies, and better wholesale market
performance, ultimately lowering prices for electricity consumers.
Specifically, it estimated RTOs would bring at least $2.4 billion in
annual benefits to the industry. Because of their independence, FERC
expected RTOs to lead to lighter regulation by reducing the need for
resolving stakeholder disputes through the FERC complaint process and
allowing FERC to provide additional latitude to RTOs in their
transmission pricing proposals, among other things.
FERC's efforts to encourage the formation of RTOs have been relatively
successful and RTOs now serve many parts of the country and extend into
Canada, as figure 1 shows. FERC oversees six RTOs: California ISO, ISO
New England, Midwest ISO, PJM, New York ISO, and Southwest Power Pool.
[Footnote 12] The Electric Reliability Council of Texas is primarily
regulated by the Public Utility Commission of Texas.
Figure 1: U.S. Regional Transmission Organizations:
[See PDF for image]
This figure is a map of the United States depicting the Regional
Transmission Organizations. The following are indicated on the map:
ISO New England;
New York ISO;
PJM Interconnection;
Midwest ISO;
Southwest Power Pool;
Electric Reliability Council of Texas;
California ISO.
Sources: FERC (data); map (Platts POWERmap, December 2007).
Note: This graphic represents the seven U.S. RTOs. FERC regulates six
of these RTOs--California ISO, ISO New England, Midwest ISO, New York
ISO, PJM, and Southwest Power Pool. It does not regulate the seventh,
the Electric Reliability Council of Texas.
[End of figure]
RTOs operate, but do not own, electricity transmission lines and are
responsible for ensuring nondiscriminatory access to these lines for
all market participants.[Footnote 13] As shown in table 1, the six RTOs
under FERC's jurisdiction, in general, are responsible for managing
transmission in their regions--by implementing the rules and
transmission pricing outlined in their tariffs and performing
reliability planning by considering factors such as weather conditions
and equipment outages that could affect electricity supply and demand-
-as well as operating wholesale markets for electricity and other
services.
Table 1: Selected RTO Responsibilities:
Category: Transmission functions;
Responsibility: Service provider;
Description: Administers the transmission tariff and provides
transmission services. Receives and processes transmission service
requests. Determines available capacity;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: Yes;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: Yes.
Category: Transmission functions;
Responsibility: Balancing authority;
Description: Integrates resource plans regionally and maintains in real
time the balance of electricity resources and electricity demand;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: No[A];
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: No.
Category: Transmission functions;
Responsibility: Reliability coordinator;
Description: Ensures the real-time operating reliability of the
transmission system;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: Yes;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: Yes.
Category: Transmission functions;
Responsibility: Planner;
Description: Works with stakeholders to develop overall plans for new
transmission needed to meet future projected electricity demand;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: Yes;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: Yes.
Category: Wholesale energy market functions;
Responsibility: Real-time market administrator;
Description: Administers a market where electricity is bought and sold
at prices determined in real-time to satisfy the difference between
projected needs and actual demand. Many of these markets price
electricity differently at various locations across the region in order
to reflect the costs associated with congestion;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: Yes;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: Yes.
Category: Wholesale energy market functions;
Responsibility: Day-ahead market administrator;
Description: Administers a forward market where electricity is bought
and sold for use the following day based on projected customer needs;
California ISO: No[B];
ISO New England: Yes;
Midwest ISO: Yes;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: No.
Category: Wholesale energy market functions;
Responsibility: Ancillary services market administrator;
Description: Category: Manages services necessary to support the
reliable operation of the transmission system and provision of
electricity at appropriate frequency and voltage levels;
California ISO: Yes;
ISO New England: Yes;
Midwest ISO: No[A];
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: No.
Category: Wholesale energy market functions;
Responsibility: Capacity market administrator;
Description: Administers a system to procure a sufficient portfolio of
supply and demand resources to meet future electricity needs and
encourage investment;
California ISO: No;
ISO New England: Yes;
Midwest ISO: No;
New York ISO: Yes;
PJM: Yes;
Southwest Power Pool: No.
Source: GAO analysis of FERC and RTO documentation.
[A] These functions for the Midwest ISO are expected to become
effective in December 2008, the proposed start date of its ancillary
services market.
[B] California ISO's day-ahead markets are expected to start in 2009.
[End of table]
Decisions an RTO makes when carrying out these responsibilities can
influence the wholesale price of electricity and ultimately the price
consumers pay. A number of other factors outside an RTO's control, such
as regulator decisions about what transmission and distribution rates
to approve and whether to implement price caps, also influence the
prices consumers pay for electricity. Prices are also highly dependent
on the cost of fuel used to generate electricity.
Typically, consumer electricity prices are composed of three broad
components: (1) distribution, which, for four states GAO contacted,
accounts for about 15 to 30 percent of the final price of electricity;
(2) transmission, which accounts for about 5 to 10 percent of the final
price; and (3) electricity generation or production, which accounts for
about 55 to 65 percent of the final price.[Footnote 14] In RTO regions,
distribution rates continue to be set by state regulators, and
transmission rates continue to be set by state and federal regulators.
FERC also approves RTO procedures for planning transmission
infrastructure, as well as the recovery of transmission expenses. The
electricity generation component was previously set by regulators based
on the cost of providing electricity plus a rate of return. The price
of this component is now determined in RTO-administered markets--
regulated by FERC to ensure they are competitive--to the extent that
entities choose to buy electricity in these markets.[Footnote 15] Some
RTOs also administer markets that determine the price of other services
needed to maintain reliability, such as capacity and ancillary
services, in lieu of charging a cost-based rate.[Footnote 16] The
generation portion of consumers' bills may also include
administratively determined payments made to generators to maintain
reliability--reliability payments, as well as a FERC-approved rate to
recover RTO expenses. The size of these components varies from region
to region. In New England, for example, on average approximately 47
percent of a typical consumer's bill in 2006 was for electricity,
capacity, and ancillary services, the prices of which are determined
through the markets this RTO administers. A very small portion of a
typical consumers' bill, less than 1 percent, was from ISO New
England's rate to recover operational and investment expenses. Figure 2
provides more information.
Figure 2: Components of a Typical Consumer's Electricity Costs in New
England:
[See PDF for image]
This figures contains the following descriptive text accompanying a pie-
chart indicating the percentage represented by each component:
Components of a Typical Consumer's Electricity Costs in New England:
Distribution costs[A]: ($68.90/MWh);
Reflect the cost of building the distribution system, as well as
operating and maintaining it (47%).
Wholesale energy price[B]: ($66.32/MWh);
Reflects a market-determined price for energy (electricity) that
includes an energy, congestion, and loss component (45%).
Out-of-market payments (reliability payments)[B]: ($5.41/MWh);
Reflect nonmarket payments to generators that the RTO determines are
needed for reliability (4%).
Transmission costs[C]: ($3.60/MWh);
Reflect the cost of building the transmission system, as well
as operating and maintaining it (2%).
Capacity costs[B]: ($1.44/MWh);
Reflect a market-determined price for procuring power resources to
satisfy the region‘s future needs (1%).
Ancillary service costs[B}: ($1.10/MWh);
Reflect the costs associated with providing services to support the
reliable operation of the electric grid (
